"Sovereign risk arises from the concern that a future government will take actions that reduce investment returns below what was expected given the policies in place at the time they were undertaken. The greater the perceived probability of this occurring, the more investors will discount potential favourable outcomes and the less likely they are to supply finance for projects.

The mining industry is, by its nature, a prime target for these kinds of actions. It undertakes investments that are risky and many of these will fail or be only barely profitable, but the visible result is the projects that are successful and that may earn very high profits. It is tempting for governments to raid those profits, especially in countries where the capacity to raise revenue by other means is limited and where political and social stability is weak.

In countries with more stable processes of policy formation and a much broader revenue base, the more likely reason for policy action to expropriate mining profits is a perception that the existing regime has not served well as a means of returning to the community an adequate share of the value of the resources being exploited. Other things equal, the countries posing the greatest sovereign risk concerns are those that initially promise the most generous tax regimes. Mining companies then need to consider how long they are likely to be able to exploit that situation before life becomes more difficult.

In the current case, there are two questions.

First, will the retroactive application of the RSPT to existing projects make investors more likely to fear similar actions in the future? Secondly, does the structure of the RSPT itself make it more or less likely that investors will fear future action that reduces after-tax profitability? These are, of course, questions to which nobody knows the answer. Reports of what suppliers of finance are alleged to have said don‟t provide reliable information even if they are true. Markets are known to over-react to news and to take some time to digest its true consequences. Given the mining industry‟s strong and vociferous reaction to the RSPT proposal and its essentially false representation of the effects on new mining investment, it would be surprising if there were not some short-term alarm in financial markets. In the longer-term, a calmer appraisal of the situation will determine people‟s risk perceptions.

Of the two questions posed in the last paragraph, the first is probably the less important. The current Australian government has demonstrated that it is prepared to act to secure rents that it sees as the property of “the Australian people”. If one had previously held the naïve belief that no Australian government would ever do such a thing, presumably one would now think it more likely than before that some future Australian government might also do so. The more important question, though, is how likely is it that a future Australian government would feel justified in acting in this way? If the perception is that the new tax provides a more reasonable sharing of the benefits of Australia‟s resource wealth between mining companies and the community than the existing regime, arguably the risk is reduced rather than increased.

This is not to say that a future government might not be tempted to increase the RSPT tax rate, say to 50 per cent. With a pure Brown Tax, this would mean that it was taking 50 per cent of the returns from projects to which it had contributed only 40 per cent of the cost. The best protection against this (as with the Goods and Services Tax, but with much better reason) is to make it relatively difficult to change the legislation determining the tax rate."

"As Julia Gillard and the miners edge closer to agreement on winding back the resources tax, our new Prime Minister would be well advised to drop the superannuation sweeteners the resources tax was supposed to fund.

In the first place, it’s bad politics. Most of us care so little about our retirement savings that we can’t even be bothered to tick any of the boxes when it comes to choosing how we’d like to have them invested. We’re certainly not going to change our vote because of the proposed changes.

In fact, the only people likely to care about the removal of the superannuation sweeteners are those working in the country’s $1.2 trillion superannuation industry... They’re keen on the government’s proposed changes because they’ll earn extra fees from the tens of billions of dollars that will flow into superannuation savings as a result of the government’s plans to raise compulsory superannuation contributions from 9 to 12 per cent and to top up the superannuation accounts of low-income earners.

The trouble is, the government’s tweaking of the superannuation system is bad policy. In his detailed review of the country’s retirement system that was delivered to Swan just over a year ago, Ken Henry had a close look at whether the compulsory super contribution rate should be increased from 9 to 12 per cent. His verdict? Leave the rate at 9 per cent.

There are strong budgetary reasons for doing so. The Federal Government loses a lot of revenue as a result of the extremely generous tax concessions that apply to super contributions. Increasing the rate to 12 per cent will deprive it of even more revenue. And superannuation is a bad fiscal deal for the government, because it loses more in the tax revenue it foregoes than it saves from future spending on the age pension over the longer term.

But beyond the fiscal impact, Henry simply didn’t see the need to increase the compulsory super savings rate. He estimated that when the super system is fully matured in the late 2030s, a person on an average income of $60,000 a year could look forward to enjoying a comfortable retirement income of around $43,000 a year (both figures in today’s dollars) as a result of combining the old-age pension and their super savings. And – this is important – Henry estimated that the age pension would still account for just over half of this person’s income.

Henry also concluded that compulsory super contribution rate of 9 per cent struck the right balance between giving people a reasonable disposable income, while still requiring them to build a retirement nest egg. He estimated that high-income earners would feel little impact if compulsory super contributions were lifted to 12 per cent, because they’d probably just reduce some of their voluntary savings to compensate. But he worried that low- and middle-income earners would have to cut back on their current spending in order to afford these extra contributions.

And Henry pointed out that the bulk of the massive tax benefits from compulsory superannuation flowed to high-income earners, while the lower tax rates were of little benefit to low-income earners.

But in their enthusiasm to construct an election-winning package funded by the resources tax, Rudd and Swan ignored Henry’s recommendations. They forged ahead with a lift in super contributions from 9 to 12 per cent. And, on the equity side, they decided to top up the super accounts of low-income earners by $500 a year. They also allowed those nearing retirement to make additional use of the generous tax concessions to top up their super savings. The cost of these supposed benefits was supposed to reach $2.4 billion over the next four years.

Now that Gillard is preparing to scale back the resources tax, it seems only right that she should drop the idea of using some of the expected proceeds of the tax to fund an ill-considered makeover of the country’s superannuation system."

Monday, June 28, 2010

Two and half years after Treasurer Wayne Swan promised to make it easier to switch home loans, it is about to become cheaper.

His much-vaunted "bank-switching package" unveiled in February 2008 amounted to little more than a website, a "hotline" which turned out to be the Securities Commission switchboard, and a requirement for banks to give their customers a list of their direct debits to take to their new lender.

But from Thursday the Securities Commission will actually be given teeth declare void so-called "unfair" or "unconscionable" exit fees that don't relate to the costs banks actually incur in closing accounts.

Financial Services Minister Chris Bowen told the Herald lenders would still be able to recover costs from lenders who left early, but would no longer be able to "gouge".

A new consumer credit law in place from Thursday will give the Commission the power to strike out "unconscionable" fees... and a new national consumer law will give it power to strike out "unfair" ones.

And some of them are high. Rate-watching service InfoChoice says a "Smart Saver" variable loan offered by Homeloans Ltd would cost $5178 to exit if $300,000 were borrowed for 25 years and the loan closed within three years.

The sum is made up of $678 exit administration fee and a $4500 so-called deferred establishment fee.

Others are much lower, the Credit Union of Australia charging $350, The ANZ charging $700 and Westpac $1150.

But the bad news is customers already on subject to those high exit fees will continue to face them.

The new powers will apply only to loans entered into after July 1.

Minister Bowen says he considered legislating to give the Commission the power to amend existing contracts but was advised it would be unconstitutional.

"It would have removed existing rights and almost certainly invited a constitutional challenge with a reasonable likelihood of success," he told Herald.

"But I do think we will see behavioural change affecting existing contracts. I wouldn't overstate it, but I think the increased attention and the the likelihood of public opprobrium will improve the way lenders treat the customers they have," he said.

The National Australia Bank which stands to benefit from the change offering the lowest variable rate of the big four was enthusiastic.

"If these new laws give Australians more power to walk down the road and find a better deal that’s a great thing," said chief executive Cameron Clyne. "It'll be good for competition and good for lenders like us who offer the most competitive rates."

The Bankers Association was more circumspect arguing that some of the fees charged on exit benefited borrowers.

"Some fees reflect the real costs of closing accounts and others are deferred establishment fees which can actually help borrowers who would otherwise have to pay upfront," said chief executive Steven Munchenberg.

"One way or another banks have to charge for setting up accounts."

Jenny Mack, chairperson of the consumer group Choice said the market wouldn't work until customers could cheaply switch.

"As rates went down consumer advice centres and the Financial Ombudsman were flooded with consumers trying to get out of mortgages."

"We think it's great that with new laws in place this is the first area ASIC and the government will target," she said.

New population statistics show a net 13,800 NSW residents pulled up stumps to move interstate over the past year, roughly the same as the number of Australians from all states who moved to Queensland.

The NSW exodus eclipses that of South Australia - the only other state to lose a significant number of locals - which parted with 3300 residents last year.

Victoria, Queensland and Western Australia gained both locals and immigrants with the three states recording Australia's fastest population growth rates of 2.13, 2.44 and 2.65 per cent.

By contrast NSW, South Australia and Tasmania grew a desultory 1.64, 1.32 and 0.89 per cent.

And despite Prime Minister Gillard's talk about population pressures on Western Sydney, the forecasts published by the Bureau of Statistics suggest the biggest pressures will be elsewhere.

By 2021 Queensland and Western Australia combined will be bigger than NSW.

By 2051 Brisbane and Perth combined will be bigger than Sydney...
But by then Sydney will be big indeed. According to the Bureau's "medium" projection Sydney will be a city of 6.7 million by the middle of this century, up from the present 4.5 million.

The high projection has Sydney passing 7.2 million residents, the low projection has it reaching 6.4 million.

By then the high projection shows Melbourne bigger than Sydney with 7.5 million people, and Brisbane and Perth combined far bigger with 4.5 million and 3.8 million.

NSW will get left behind partly because its own residents are leaving, partly because its traditionally high share of migrants is shrinking, and partly because with South Australia its population is having babies at the slowest rate on the mainland.

NSW is amongst the most aged of Australian populations with almost one million of its residents - 14 per cent - now aged 65 or over. Only South Australia and Tasmania, each with 15 per cent, have older populations.

Western Australia is the most youthful state, with only 11 per cent of its population aged 65 or over, and the Northern Territory by far the most youthful region with only 5 per cent of its population over 65.

The latest projections have Australia's population climbing from 22 million to a high between 30 million and 40 million in 2051 with a central projection of $34 million.

By then NSW will account for just 29 per cent of Australia's population, down from its present 33 per cent.

The ABS projection projection is lower than the figure of 36 million included in this year's International Report and the ABS figures suggest it may soon be lower still.

Australia's immigration rate fell last year and is set to fall further in response to changes in the rules governing foreign students and working visas.

Julia Gillard's attempt to distance herself from predecessor Kevin Rudd on the question of population growth sits uneasily with the latest population statistics.

Released on Thursday as Ms Gillard took the prime ministership the ABS figures show population growth slowing sharply during 2009 with the growth rate slipping from from 2.16 to 1.99 per cent.

The December quarter increase of just 0.41 per cent is lower than at any time during the financial crisis.

The change reflects a lower birth rate as a mini baby boom eases and also lower immigration during the financial crisis. But recent government changes to the rules governing foreign students and working visas suggest the lower immigration rate might be here to stay.

The Bureau's central projection has Australia's population climbing from 22 million to 34 million by 2051, somewhat less than the 36 million projected in the intergenerational report greeted by Mr Rudd with the observation that he welcomed a "big Australia".

Prime Minister Gillard said yesterday population minister Tony Burke would henceforth be known as the "minister for sustainable population" and said she did not "believe in a big Australia".

"I am a migrant," she told the Nine network. "My parents came here at a time that the country was saying to the world we’ve got a population of around about 11 million, we want to build it up. The big focus then on populate or perish."

Melbourne Lord Mayor Robert Doyle dismissed her stance as naive.

"I'm not sure how you stop Australia’s growth," he said. "It is a bit naive to say you are against a big Australia. If not a big Australia then what Australia?"

The former Opposition leader said high value industries such as biotechnology would help the city prosper, but that Australia needed "a larger and more educated population to grow more of those jobs".

The Committee for Melbourne said the city had to have a long term plan for growing the population, rather than pretend growth would not happen.

Chief executive Andrew MacLeod questioned whether the community was concerned about population as such or that Australia’s infrastructure could not cope with future numbers.

"No one in Australia supports mandatory controls for natural population size, so we need to recognise that growth would come even with no migration,’’ he said.

Greg Evans at the Australian Chamber of Commerce and Industry said while growing cities did place pressure on infrastructure it was also important that Australia be able import skilled workers.

The Australian Conservation Foundation supported the Prime Minister but said she now had to develop a strategy.

"A sensible population policy would set clear targets and plans for dramatically reducing greenhouse pollution, improving water and energy efficiency, stabilising the population in the long term and protecting key ecological assets," said spokesman Chuck Berger.

Former NSW premier Bob Carr said 80 per cent of Australians would agree that Australia needed "breathing space".

"Immigration has been run at levels that are simply too
ambitious," he said.

Monash University demographer Bob Birrell said the Prime Minister’s comments were a "huge departure" from Mr Rudd but questioned whether Ms Gillard was serious as the debate had to deal with immigration.

Opposition Leader Tony Abbott said "Kevin Rudd's big Australia was her big Australia for months" and asked "what is she actually going to do to make a difference?"

"I tell you what, if she wasn't wasting money on overpriced school halls we'd be able to have some of the decent infrastructure to actually cope with this increased population," he added.

The ABS figures show Victoria, Queensland and Western Australia to be the fastest-growing states with annual population increases of 2.1, 2.5 and 2.6 per cent. NSW, South Australia and Tasmania are the slowest-growing advancing by 1.6, 1.3 and 0.8 per cent. NSW and South Australia are actually losing locals to other states while Victoria, Queensland and Western Australia are gaining.

The Gillard government is just days away from unveiling a reworked version of resource super profits tax.

The redesigned tax will cut the impost that would have faced coal seam gas and also liquid natural gas produced from the previously exempt North West Shelf.

Low-profit industries such as sand and gravel will remain outside the super profits net, paying royalties as at present.

The changes will boost the level at which the new tax cuts in and modify the plan to carry the industry's losses, both of which are expected to be attractive to the the big miners.
It is unclear whether the government will cut the 40 per cent rate.

Pressed yesterday to confirm Mr Rudd’s position that the 40 per cent rate was a central element to the tax, the Prime Minister deliberately left open the issue.

“Each and every decision I’ll take as we genuinely negotiate, will be driven by what is in the best interests of the nation,” she told the Nine Network.

“I’m throwing open the door of the government, if they can open their minds and I think we are well on our way to seeing an opening of the minds, and a respectful genuine negotiation.”

The package to go to Cabinet today is not final in the sense that it will leave details still to be negotiated with the mining companies, perhaps over a period of months.

The companies themselves have heard nothing new from the government, with one of the big miners saying it is yet to be invited to a meeting.

The reworked tax is likely to be unveiled later this week after Treasurer and Deputy Prime Minister Wayne Swan returns on Wednesday from the G20 heads of government meeting in Canada.

It will be sold as raising as much revenue as intended making use of higher forecast commodity prices for petroleum, iron ore and coal.

On ABC radio's Sunday Profile Resources Minister Martin Ferguson would not say whether the change would be a "tinkering with" or a "wholesale rewriting" of the super profits tax, but did say the tax would remain "profits-based".

Saturday, June 26, 2010

"The young men in Kevin Rudd's press office could get old and not even notice. The nerve centre of the 24/7 enterprise hums in a Neverland-like present. This illusion is reinforced by clocks along the wall. There are four, but three have stopped working.

It's 6am. Spring fog hangs heavy outside and the hair of Sean Kelly, a prime ministerial press secretary, is still wet. Suite MG65 smells stale on first contact, like discarded running socks or the signature left by the alpha males who have inhabited the PM's press office for the past 20 years.

A forlorn pot plant on the window ledge swoons; another leans into the frame, its will to stand upright lost.

The press office has an almost ostentatious lack of adornment, like a bunch of Swedish modernist freaks have moved in and swept the joint clean. This is not the environment of a particular aesthetic but the reflection of its inhabitants who live almost entirely at the whim of the man running the country, who have little more certainty than the next bullet point on the Prime Minister's ''tick tock''. Dried rations are stashed under the desk. There are no family photographs because there are no families...dogs, lawns or detritus of any kind, apart from some long-suffering girlfriends. A half-eaten punnet of cherry tomatoes sits on a desk.

Looking down benevolently from a framed black and white photograph on the wall is Bob Hawke in budgie smugglers clutching a beer. On the pin board is the word ''perspective'' accompanied by its various definitions.

Lachlan Harris strides into the office at 6.02am and plops down at a round table strewn with newspapers and press clippings. ''Perspective'' is framed neatly behind his head as he shuffles papers and speaks to Kelly in a low voice. Serious calls are taken outside, out of the earshot of snoopy.

Harris, at 30, is chief warden on the prime ministerial prison block, except his weapon is a BlackBerry, not a baton. If Harris calls you, it's serious. If you call Harris, then that's usually serious as well. The media office is only 10 per cent of Kevin Rudd's operation, but its tentacles stretch across the Government imposing an unprecedented level of discipline on a tame-cat caucus and on cabinet ministers, who rarely strain in the yoke.

In the office next door sits another relentlessly youthful aide who has clocked on at 4am to collate every major story running on television and radio. Four LCD television screens are on his wall - an innovation of the Rudd Administration. John Howard vetoed such new fangled machinery. All the televisions work, all at low volume, creating a wall of white noise, and a vague sensation you could be at Cape Canaveral. It's a miracle nobody's head explodes. By 11 o'clock, the young man tips his hat to humanity and springs a nosebleed. He needs to fetch his own paper towel. I suggest he tip his head back, which seems to do the trick.

Things are calmer in the PM's office now than they were in the heady days of setting up government after 11 soul-sapping years in Opposition. People are more relaxed, hence my presence with notebook and pen on the couch at the fag end of the sitting week.

The Herald was given unprecedented access to the Prime Minister's office to record a day in the life of the people running the country. Senior staff in the office spoke about their roles and their experiences, some for the record, others on background.

When the invaders of November 2007 first took possession, no one dared speak lest it denote hubris or lead down the slippery slope of ill-discipline. Many fretted about the adrenaline-charged punks running the PMO, and wondered whether the Prime Minister should go crazy and hire the odd grown-up.

The office has seen substantial turnover. Some were eased out. Others couldn't hack the madness, or the Swedish minimalism, or the cliques that spring up in political offices, the unreconstructed fiefdoms fuelled by cult of personality. ''Kevin is not an HR manager,'' says one senior figure. ''He is hands on and unpredictable with working hours. He can rest but they can't. Coming out of opposition, some people didn't make the grade. If people aren't up to it, then you can have some abrupt departures.'' Women also struggle to make the cut at senior levels in this office. They want inconvenient things, like infants and lives. And the blokes absolutely run this show. They like football, and novellas, and blogs, and popular culture in boxed sets of DVDs they can devour down the back of the Prime Minister's plane. One suspects baby is very much in the corner in this atmosphere.

Some within and outside Government still don't like the operation, but they worry less. Now government staff can occasionally be sighted in Canberra restaurants with a beer in hand, apparently in high spirits. Sometimes Rudd's Lost Boys even laugh. Out loud. With people watching.

The office has survived two critical stress tests: the global financial crisis and the political crisis created by Utegate and the rogue public servant Godwin Grech. Some close observers believe the Grech episode was critical in defining the new ''settled'' psychology of Rudd HQ.

For an agonising 24 hours, the Prime Minister's career hung on the word and the bureaucratic tidiness of one of his young advisers, Andrew Charlton. One person puts the analysis this way: ''The question was could they trust Charlton - an inexperienced 27-year-old only several months in the job - when he said he didn't send the email. Was the Prime Minister right to put his trust in these people - the micro-managing, inexperienced, immature office. History shows Rudd was right. If that episode had turned out differently it would have legitimised the criticism.''

Charlton, a pale, conventionally handsome economist, drifts in and out of my sightline during the day. He is often pegged as Kevin Rudd's economics adviser, but his real job is part sherpa, part emissary, part son surrogate, and his function is executive.

He runs an operation some heretical Government types dub the ''Hollowmen Unit'' - responsible for co-ordinating question time and the lines crafted to pitch the Government's message into the news cycle.

Harris and his operation is complementary to this process, although gossip around the Government suggests occasional tension between the two. Government press secretaries co-ordinate their activity according to a strict routine. The first phone hook-up is 6.15am, when major news stories are briefed. Advisers craft the message of the day and decide who will deliver it. Issues are ''incoming'' or ''outgoing'' - potential problems coming in, and the messages going out.

''Incoming'' this morning is the continuing controversy over the Government's stimulus-related spending on schools and border protection. Outgoing material is good news from an OECD report overnight, and the continuing splits within the Coalition.

Backbenchers hand-picked from the class of 2007 are nominated to field questions from journalists camped outside the doors of Parliament House. Further discussion follows at 8am, then the office rolls forward into the tactics meetings that determine the Government's question time strategy. By 6.30pm, the press secretaries hold their final hook-up of the day, where they report back on the news cycle, courtesy of whatever intelligence they can gather via a trawl through the press gallery upstairs; and they resolve on the message to push for the next day.

This degree of orchestration is unprecedented in Canberra, and the disciplined routine is replicated across the other 80 per cent of the Rudd operation, which funnels policy material into the now very powerful subcommittees of cabinet where actual decisions are made. Cabinet itself is little more than a rubber stamp and a political debating forum.

John Howard's team ran a tight ship but Liberals would not cop this strait-jacket. Running on a rat wheel, day in, day out, rain, hail or shine. ''Is there an upside to this madness?'' I ask one sensible government staffer. ''It works,'' he replies.

By 11am, we are outside Kevin Rudd's private office. Sean Kelly, his trademark Wolfmother hairdo now dry, is beside me. Inside is Kim Beazley, who in about five minutes will be Australia's new ambassador to Washington. Brendan Nelson suddenly materialises, smiling. He notes me and tries not to look startled. Nelson is ushered inside. Kevin Rudd grins like the Cheshire cat through the open door, which quickly shuts again, muffling Beazley's booming laugh.

After a short time, the door opens again and we are ushered in. Harris tells me out of the side of his mouth the conversation is off the record. Rudd, Beazley, Nelson and the Foreign Minister, Stephen Smith, sit in a circle of squat orange chairs, making polite small talk. Over near Rudd's desk is Alister Jordan, the PM's chief of staff. His demeanour is priest-like. He cups his chin in one hand, the gesture of a man much older than his 30 years.

Rudd's office is warm and intimate, littered with the human touch: of books and photographs, and illuminated with ambient light. The space seems to swallow sound, protecting the intimacy of its conversations. It is hard to imagine Beazley and Nelson looking any more pleased. The group whisks out the door to face the waiting media, transformed from my altered vantage point into a hunting pack.

By noon, I'm in the office's geographical heart, surrounded by young women, the administrative assistants. The plants are healthier, the folders are imposing and colour-coded. Surrounded by sirens after a morning of testosterone. The office layout is ridiculous. It feels like a labyrinth. The uninitiated might get motion sickness, such is the pace at which these people move and take corners on two wheels.

A reception area divides the apparatchiks from the departmental liaison officers, who scurry about pre-question time, and the speech writers, Tim Dixon and former journalist Maria Hawthorne. The speech writing pod has a think-tank vibe with books and a designer chair. Ronald Reagan and Barack Obama look down from walls littered with books. Across from them is a private dining hall, a 1980s monstrosity complete with mirrored panelling. Back a bit is the sitting room, where A Current Affair crew is camped out waiting for three minutes with Rudd.

Harris pilots me across the hallway into the cabinet suite with its little rabbit warren of offices. We enter a nook that contains another small clutch of advisers, and an apparent computer graveyard. This space once housed John Howard's cabinet implementation unit. The space also contains an enormous safe, large enough to hold all cabinet documents in pre-electronic days. People are coy about what it might hold now. An adviser tells me a bureaucrat still carries in a briefcase the codes to all safes. ''Like the nuclear codes?'' I ask. ''I don't think the briefcase is actually handcuffed to the official,'' the adviser replies.

By 2pm, question time beckons. It's Thursday and most of the parliamentarians just want to get the hell out.

Jordan and Charlton sit at the front of the advisers' box, looking learned and strangely unflappable. The messages of the morning are amplified here.

Back in the office, I speak with Harris about him, and his colleagues, about growing older in increments in Neverland. It's uncomfortable, not excruciating, for Harris to try to analyse the operation. Does he think that surviving the Grech episode is a turning point of sorts for the office?

''No single event is an end point,'' he says. ''Every day - we have to deliver every day. Politics is not a great industry to look for milestones.'' Does the office feel vindicated by the wash-up then? ''That may be a perception - I don't know.'' Does he accept any of the internal critique that his part of the operation is too controlling or too relentless? ''I don't think what we do is any different to the level of co-ordination that existed under the Howard government. This is a phenomenon of modern politics. The days of ministers refusing to answer questions beyond their portfolios are now behind us. The fact that people are hearing one view and not contradictory views makes it easier to understand our message; and it's the policy, it's the substance that matters.''

By 5pm, I float through the office to speak to Jordan, and to the deputy chief of staff, David Fredericks. Their offices face each other across the corridor. Neither will speak on the record. The boss is the focus, not the staff - but we chat about running an office and clarify respective roles and responsibilities. Jordan's mannerisms are a faint echo of Rudd's. There is a deliberation in the movement which reflects his even temperament, and his well-honed strategy of conserving energy for the things that actually matter.

Describe Jordan in a sentence, I ask one of his colleagues. ''King of the world,'' came the reply. Jordan has a closeness with Rudd that makes him singularly powerful. It is the gift of his long and patient apprenticeship with a very exacting taskmaster. The older Fredericks sits on top of the policy unit, managing 10 staff, but his political judgment is sought, too.

Tim Costello, brother of Peter, popped in to see Rudd this week. The two talked history. A few weeks earlier, Costello tagged along to Harris's 30th birthday celebration at a Narrabundah restaurant. ''I was really impressed with the camaraderie and the humour and, dare I say, the fun, of the evening,'' says Costello.

''There was a genuine sense that these people like being together. The Godwin Grech episode bonded them. They stood up in the fiery furnace and the belly of the beast.''

At day's end, I ask Harris if he's dreaming of life outside. ''I love politics,'' he says. ''I'm not just interested in the Labor Party; I'm interested in politics.

''The Obama victory for me was like a footy final. I love this job. I love the competition. I love the debate. Keep it coming.''

New figures show financial wealth per capita climbed to $46,000 in the March quarter, an impressive increase on low point of $36,200 reached just 12 months earlier.

The measure includes household wealth held in the form of cash, bank deposits, bonds and shares net of borrowing but excludes "non-financial" wealth in the form of real estate.

The latest recent high of $46,000 per person is still well below the all-high of $58,900 reached before the financial crisis.

Both household financial assets and household liabilities climbed to record highs of $39 billion and $25 billion in the March quarter.

Our debt to liquid assets ratio climbed to 154 per cent meaning that households don't have enough readily available assets to cover debts in an emergency.

"Households generally have plenty to cheer about," said Commonwealth Securities economist Savanth Sebastian who calculated the per capita figures from the Bureau of Statistics data released yesterday. "As the recovery gains traction the lift in wealth should support confidence... and in turn translate to an increase in spending and overall economic activity."

Both superannuation funds and Australian businesses remained cautious, with the funds holding 14 per cent of their assets in forms such as cash and bank deposits at the end of March - almost double the usual proportion of 8 per cent. The proportion of company assets held in cash climbed to the highest point in a decade.

"Super funds are spoilt for choice given the attractive yields being offered on term deposits," said Mr Sebastian. "But the longer that fund managers maintain an abnormally high proportion of money in defensive assets, the greater the risk their returns will underperform those of their competitors."

Foreign investors continued their love affair with Australia, buying an extra $6.3 billion of Australian shares in the past quarter. Just over 40 per cent of listed shares are now held abroad, close to a record high.

"The next round of data might show a reversal of this trend," said Mr Sebastian. "The Resource Super Profits Tax had a clear impact on the way global investors view Australia’s sovereign risk profile and as such until it is resolved, foreign investors are likely to remain cautious on Aussie equities. But in the longer run, the strength of domestic companies, and in particular the resilience of the Australian economy will no doubt remain a strong drawcard."

Wayne Swan will fly out for Canada this afternoon to attend the G20 Summit after all.

He withdrew from the summit a few days back to broker a deal with the miners. Now as Australia's new Deputy Prime Minister he'll attend in place of Julia Gillard.

Those who know him say its hard to be sure how ambitious he ever was. As Labor's family services spokesman for six years from the late 1990s he resisted suggestions to tradeup to a grander sounding portfolio. It was only when virtually ordered to take the Treasury portfolio after Labor's election loss in 2004 that he accepted "as anyone would, " as he he put it in the introduction to the book Post Codes he subsequently wrote about disadvantage in Australia.

As a Labor Party apparatchik in Queensland in the early 1990s he displayed a touch of genesis working out how to unseat the enormously popular Lord Mayor of Brisbane Sallyanne Atkinson. Discovering she was paid more than the Prime Minister he dubbed her "Salaryanne"... and succeeded in getting replaced the virtually unknown Labor candidate Jim Soorley.

Had he stayed in the background or moved to the national ALP machine he would have been good, but he was determined to be in politics himself and was not put off when he was defeated after just one term in 1996 nor when after being reelected he discovered in the 2001 campaign he had cancer. He swore his older children to secrecy as he prepared for an operation and didn't tell his youngest, Matthew - only to discover later Matthew had blurted out during Show and Tell at school that "his Dad had cancer, but that the class was not allowed to tell anybody - especially Laurie Oakes".

In his early months as Treasurer after Labor's 2007 win he sounded robotic, the result colleagues say of trying too hard. "His approach to any problem is work harder," said one. "He kept getting in earlier." During the financial crisis he began work at 6.00 each morning putting in 18-hour, sometimes 20-hour days. Along the way his demeanor changed. In the selling of this year's budget he sounded less robotic, more at ease and more in command than his former rural Queensland schoolmate Kevin Rudd. No-one who knows him doubts his genuine commitment to improving the improving the lives of Australians. It has made him a very Labor Treasurer, automatically viewing most things through the eyes of Australia's least well off. It'll make him a very Labor Deputy Prime Minister.

"The government has resolved to change its controversial resources super profits tax so that it is similar in design to the existing petroleum rent tax.

It will use additional revenue generated by higher commodity prices forecast for petroleum, iron ore and coal to fund transition arrangements for the industry, which has fought tooth and nail against the proposal.

The government will leave minor players in the sector — such as sand, gravel and also commodities such as nickel — outside the super profits net.

It has backed in solidly behind the 40 per cent rate — but it will boost the level at which the tax cuts in and modify its original plan to carry the industry's losses."

Wednesday, June 23, 2010

Want to hear a good economist joke? The economist and the entrepreneur are out for a walk. The entrepreneur points down and says "there's a $20 note on the footpath".

The economist replies, "no there's not; if there was, someone would have picked it up by now".

We laugh because it makes the economist sound stupid, but also because we know the economist will pretty soon be right. If the money hasn't been picked up, it will be - most probably by the entrepreneur herself.

Which cuts to the quick of why mining executives and the sort of economists employed by the Treasury don't understand each other - genuinely.

Let's start with the miners... They say the proposed tax will make Australia a less attractive place to mine. While still attractive (miners will get 60 per cent of everything they make above the bond rate before paying tax) Australia will be pushed down the list of attractive locations. Management and capital are limited, and so they will be more likely to direct those limited resources somewhere else.

Alan Auerbach is professor of economics at University of California, Berkeley. The Henry Review consulted him while drafting its report and he is back in Australia for the conference on the wash-up.

Here's how he characterises the differences between the camps:

"One thinks that if the project earns a satisfactory rate of return it will be undertaken; the other thinks miners look for the highest rate of return and then stop."

"We teach our students in economics and business that if their cost of funds is say 10 per cent or whatever, and there is one project that earns 50 per cent and one that earns 20 per cent, they should undertake both. The miners seem to be saying - we only have one chief executive, he can only think about one thing at a time, and the bank won't lend us more money - we will stick with one."

The miners are saying that if there is $20 lying on the footpath they are going to leave it there.

The point about the fallacy of composition is that both the miners and the Treasury might be right.

Let's talk about football. If you go to oval with a fruit box and stand on it you will get a better view. But if everyone goes to the oval with a fruit box and stands on it the view won't have improved at all. The fallacy of composition is the fallacy of thinking that what is true for an individual is true overall.

Auerbach says he accepts that a single mining company might say, "our executives need to play golf and do other things, we will just do one mine and we do it in Brazil instead of Australia because taxes are lower there".

But then he says another company will come in, buy the right to mine the land at a lower price (the tax will have pushed down the price) and mine it anyway. What was true of one company will not be true of companies in general.

And it is companies in general that matter to the Treasury and Australia, even if those companies don't yet exist. Fortescue calls itself "the new force in iron ore". It was created in 2003. New mining companies do arise to sweep up notes left on the pavement by the older more choosy ones.

But what if they can't get the finance? To a Treasury or academic economist the concept of not being able to get finance for an attractive proposition is a strange one. The tax is designed to ensure the proposition remains attractive. Sixty per cent of excess profits are always left in and if the profits drop too low the tax drops to zero. But it could happen. Sometimes (usually for short periods of time) capital markets don't work.

But the minerals will still be there, ready to be mined as soon as someone can get the finance. Businesses are not so lazy as to let money lie on the footpath long while there's a chance of picking it up.

Or at least that's how the Treasury and the professor see it.

But can't our big mining companies see that too? Can't they see that if they don't mine someone else probably will, I naïvey asked the professor.

His brutal reply was that even if they can see it they don't care.

"It is wrong to think that if a company is against a tax it is because the tax discourages activity in the industry," he tells me.

"You could come up with a higher tax that would actually encourage activity in their industry; I believe this is such a tax - but it would still make the industry unhappy."

The professor's bottom line: the industry does see things differently to the Treasury, most likely genuinely. But even if they could see things more broadly they would still oppose the tax. It is designed to grab more of their profits.

You know, you have to believe that Ken Henry really doesn’t understand academics at all when he publicly says stuff like this:

“Whenever an idea is ventured publicly by a person, whether that person is a policy advisor or whether it’s a government minister, there’s at least a handful of academics who will contest it,” he said. “I’ve seen it on both sides of politics – this is not a partisan comment at all – but for governments, government ministers who are seeking to get ideas legislated – it is unbelievably frustrating, incredibly frustrating.”

“It is a great strength of economics as a discipline. It is one of the things that as a young person I found very attractive about the study of economics, this contest of ideas. But I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus”…

“I have enormous respect for Ken Henry, but he can’t believe that you should have consensus because it is better to have bad policy that everyone agrees with than eventually get god policy that will work.”

He goes on:

"If the government won’t engage you behind closed doors then an academic has no other choice than to express their opinion in the public interest in public for the public to assess."

Warwick, like many, have opposed the Government strongly on many policies. And in so doing, he has added to the debate and in some cases there is arguably success in getting sense put in place. It is tough thing to do and it frustrates me to see it so derided.

But I want to add a few things here. First, let me tell you, praising the Government is as thankless a task as critiquing it... I was someone who fell behind the Government and wanted to get the ETS done and said so publicly in the face of criticism myself. I was someone who fell behind the Government and argued that we should pay attention to the evidence on FuelWatch and give it a go. And I was someone who, after years of critiquing their broadband policy, praised them when they moved in the right direction. And was I ever able to be brought in to help improve these policies (something they could clearly use)? No. Whenever I tried I was given the clear message that there are insiders and there are outsiders.

Warwick is actually one of the insiders. I write blogs and occasionally newspaper pieces only to find the Government abandoning those policies that I supported for political and expedient reasons rather than on the basis of evidence. I find myself often wondering these days if it is really worth the effort to write long submissions to Parliamentary inquiries, conduct research in policy-relevant areas and stick my neck out at all only to wake up and find that we are all really just an annoyance anyway.

Second, this is isn’t a problem with just this Government. They are all like this. The Howard Government in the face of the clearest evidence that it was poor policy went ahead with the introduction and then increments to the baby bonus despite the strain that put on maternity hospitals. Where was Treasury then? How could it be that the mistake was made and then repeated two times with ample time and options to get around it? And I will continue to harp on me and fortunately I get to write textbooks so that our students can see what a broken evidence-based policy system looks like.

In the US, I can see that things are very different. The Government consults regularly with outsiders and genuinely solicits advice. I have seen it happen, not just here at Harvard but all over the place. In Australia, the aura is one of distance. Now I am not saying that Ken Henry or anyone else has to engage with me personally. Just being a professor commands no such right. But I would like to see him and the Government actually engage with some outsiders regularly rather than project the image of distance. But regardless, there is surely no right to consensus until the Government has earned it. They have far to go. If asked, I’ll gladly help. Otherwise, I speak my mind from the sidelines."

One of Australia's leading academic economists and a member of the Reserve Bank board has taken on Treasury boss Secretary Ken Henry accusing him of failing to consult experts while trying to silence them.

Warwick McKibbin, director the Australian National University's Research School of Economics said he was stunned by a call from Ken Henry on Monday for academics to "put down their weapons" rather than nitpick over government proposals such at the emissions trading scheme.

"I don't know whether Ken was fingering me, but there's weren't too many other people out there arguing against an ETS," he said from the ANU yesterday

"I have enormous respect for Ken Henry, but he can't believe that you should have consensus because it is better to have bad policy that everyone agrees with than eventually get god policy that will work."

"The ETS was a flawed scheme. Had the government got it through it would be dead by now because of the financial crisis."

"I also disagreed with the scale of the stimulus package, and I would say I was right... It wasn't evidence-based policy, they panicked. The government put the money into school buildings, they put it in insulation, they put it in stuff they could never reverse."

"The government rammed those decisions through the economy even though they were fraught with risk. No-one was consulted about an alternative view and if you did say anything you were attacked by the the Treasurer and the Prime Minister in public."

Professor McKibbin sits with Dr Henry on the Reserve Bank board and says the only debate he now has with the Treasury Secretary is at the board table.

"If the government won't engage you behind closed doors then an academic has no other choice than to express their opinion in the public interest in public for the public to assess, he said broadening his attack the Rudd government's mode of operation.

"The stimulus created a problem. The government overspent, but they had enough in reserve. Then they decided that because of politics they had to get their spending back so they could claim they had fiscal surplus, for which there is no economic basis by the way, so they come up with a really badly designed resource tax to try and get the position to look good three years from now, and in the middle of a sovereign risk crisis exposed the economy to a reassessment of sovereign risk."

"I am stunned that the Treasury keeps supporting the government."

"The review of the tax system should have been independent of the Treasury and then critiqued by it and other economic agencies."

"The government has ceased to use the Productivity Commission for sensitive questions. It should have been critiquing the National Broadband Network which is a gigantic white elephant waiting to happen."

"Treasury as far as I can tell has become an arm of political policy."

"Historically they have always been the ones who have said - wait a minute - this policy of subsidising green car to try and save the constituents of a particular electorate is not a very sensible way to spend eight billion dollars -- you just don't see that now."

"You see Treasury officials producing what I consider to be fairly politically-based evidence in support of particular political policy, not economic policy."

Tuesday, June 22, 2010

Treasury boss Ken Henry has reentered the tax debate issuing an extraordinary call for economists and tax experts to "put down their weapons" and get behind proposals such as the government's proposed resource super profits tax.

Briefly interrupting an overseas holiday to address a Sydney conference on the outcome of the Henry Tax Review he said it was "unbelievably frustrating, incredibly frustrating" for people advising governments of both stripes that economists seemed "loathe to come to a consensus position on anything".

"Whenever an idea is ventured publicly by a person, whether that person is a policy advisor or whether it's a government minister, there's at least a handful of academics who will contest it," he said. "I've seen it on both sides of politics - this is not a partisan comment at all - but for governments, government ministers who are seeking to get ideas legislated - it is unbelievably frustrating, incredibly frustrating."

"It is a great strength of economics as a discipline. It is one of the things that as a young person I found very attractive about the study of economics, this contest of ideas. But I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus"...
Dr Henry spoke as the mining giant Xtrata and the West Australian Chamber of Minerals released what they said was new economic research confirming the mining tax would harm Australia's economy.

"There is a recent example of what I am talking about," Dr Henry said. "I'm not going to comment about the resource super profits tax, but I will talk about the emissions trading scheme. Most academic economists accepted, at least behind closed doors, that it was a sound policy idea. Yet there were no end of academics who wanted to say for example, it's not bad, but a carbon tax would be better."

"That did not increase at all the chances of a carbon tax being legislated. All it did was reduce the chance of an emissions trading scheme being legislated."

"In the way in which political debate occurs in Australia, such statements do enormous damage to the prospects of sensible reform. There are times when it would serve the national interest if economists could just call a halt to the war for a while."

The Treasury Secretary said he saw no sign of the Rudd government backing down on the resource tax.

"I haven't myself come to the view that this particular reform proposal has dim prospects, he said. "I do not see it that way yet at all. The tax is not due to start for two years."

"What I am witnessing at the moment doesn't surprise me in the least," he said referring to the mining industry's campaign.

"Does it cause me any particular grief? Maybe the scar tissue has hardened. After 25 years of providing tax policy advice, no particular grief."

"It is tough to convince a wary public; tougher still cynical media. And virtually impossible – in Australia at least - to secure political consensus on any tax proposal other than a straightforward cut."

Parliamentary Secretary for Disability Services Bill Shorten has reversed what many saw as a budget cut and launched a year-long inquiry into organisations that employ disabled Australians.

"I think disability employers serve an important function," Mr Shorten told the Herald/Age ahead of announcing the inquiry today. "But frankly some are held together by sticky tape and band aids."

"They need to get people onto their boards who have accountancy skills and marketing skills - it is no longer enough for these operations just to be run by people who care, they have to be run by people who care and can count."

The 206 companies supported to employ 19,000 disabled Australians were shocked to discover on budget night that their government funding had been frozen after years of getting what amounted to annual increases of around 3 per cent.

"We had already had a rough time through the economic downturn, but it was a shock to find nothing in the budget to reflect cost increases," said Ken Baker, chief executive of the umbrella organisation Australian Disability Enterprises.

"To his credit Bill Shorten has listened and responded and come up with 2.4 per cent. There's some way to go, but this will help members that were on the edge."

Mr Shorten said the apaprent funding freeze flowed from an earlier decision of the Howard government to provide a temporary funding boost that was not included in budget forward estimates.

"But whatever the reason, you've still got to solve the problem," he told the Age. "The trick in negotiations is to move them from a single issue to multiple issues, so I have found more money but I've also found a way to keep their costs down by freeing them from the need to do quarterly worker assessments for a trial period of a year."

Combined the two measures should boost the financial position of disability employers by around 3.5 per cent.

Mr Shorten praised the work of organisations such as Endeavour in NSW and Queensland which makes furniture, runs farms and packs food and Waverley in Victoria which mows lawns, manufactures equipment and provides corporate catering.

But he said some of the smaller organisations should merge.

"Some should remain but if we want to get beyond hand-to-mouth funding we have got to encourage them to promote their existence and their value."

"It will not be a shakeup as such. I don't want to make people nervous - no disabled worker will be displaced. But if we are funding 19,000 people with special needs we need to do it well."

""We need to look at whether $10,000 per disabled worker enough."

With Finance Minister Lindsay Tanner Mr Shorten had already government tender guidelines so departments could allocate contracts to disability employers without the need to seek competing bids.

The inquiry will be conducted by staff of Mr Shorten's department and will seek public submissions.

Mr Baker welcomed the inquiry saying if the enterprises folded or did not work well 20,000 Australians with quite severe disabilities would find themselves sitting at home.

Sunday, June 20, 2010

"AGREEMENT BETWEEN NBN CO AND TELSTRA ON THE ROLLOUT OF THE NATIONAL BROADBAND NETWORK

The Australian Government today welcomed the announcement by Telstra and NBN Co that they had entered into a Financial Heads of Agreement.

This agreement paves the way for a faster, cheaper, more efficient rollout of the National Broadband Network, with faster take-up.

This is an important step in the delivery of the single largest nation building infrastructure project in Australian history, which will increase national productivity and help build a stronger economy.

The Agreement between NBN Co and Telstra, worth an expected value of $9 billion, provides for:

. The reuse of suitable Telstra infrastructure, including pits, ducts and backhaul fibre, by NBN Co as it starts to rollout its new network – avoiding unnecessary infrastructure duplication; and

. The progressive migration of customers from Telstra’s copper and pay-TV cable networks to the new wholesale-only fibre network to be built and operated by NBN Co...The Agreement means that:

. Taxpayers benefit because it reduces the overall cost of building the network and will result in higher take-up rates and revenue for NBN Co.

. A greater proportion of the NBN rollout will be underground, with less overhead cabling.

. Australia’s largest telecommunications company, Telstra, will become a participant in the rollout of the NBN, and is likely to become NBN Co’s largest customer.

Combined with Australian Government public policy reforms, Telstra estimates that the agreement announced today will deliver Telstra a post-tax net present value of approximately $11 billion. The payments by NBN Co to Telstra would be made over a number of years as the rollout progresses.

Through the migration of Telstra customers to the NBN, Australia will benefit significantly from a national wholesale-only broadband network, delivering structural separation of Telstra.

This historic microeconomic reform will ensure Australia finally has a genuinely competitive telecommunications industry which works for all Australian households and businesses, and helps to drive long-term productivity growth in our economy.

The Australian Competition and Consumer Commission will review the competition aspects of this agreement as envisaged in the Telecommunications Competition and Consumer Safeguards Bill, which the Government still hopes to pass to provide greater certainty to industry.

In support of the Agreement, the Australian Government will progress public policy reforms to support the transition to NBN to which Telstra attributes a value of approximately $2 billion.

It will:

. Establish a new entity, USO Co – with Commonwealth funding of $50 million in 2012-13 and 2013-14, increasing to $100 million per annum thereafter. The remaining funding that USO Co requires will be contributed by industry, as it is now with final arrangements subject to industry and stakeholder consultation;

. Provide $100 million to Telstra to assist in the retraining and redeployment of Telstra staff that will be affected by this very significant reform to the structure of the telecommunications industry; and

. Require NBN Co to be the wholesale supplier of last resort for fibre connections in greenfield developments from 1 January 2011.

These important contributions were provided for in the 2010-11 Budget.

USO Co will assume responsibility for most of Telstra’s Universal Service Obligations for the delivery of standard telephone services, payphones and emergency call handling from 1 July 2012.

This will ensure that essential communications services are protected and assist the structural reform of the industry.

Telstra, NBN Co and the Commonwealth agencies will now move to negotiate detailed Definitive Agreements, which is expected to take some months.

When these negotiations are concluded the Definitive Agreements will be put to Telstra’s shareholders and the Government, for final approval.

While today’s announcement is a significant step in the rollout of the NBN, as confirmed by the NBN Implementation Study, this project would still be financially viable even without the participation of Telstra.

The NBN is critical to securing Australia’s international competitiveness. It is central to Australia’s economic future because it will deliver universal superfast broadband to all Australian households and businesses no matter where they live or do business."